If only looking at the world’s diversified miners was simply about the quality of the materials they pull out of the ground. Instead, these commodity-producing giants seem to be dogged by run-ins with governments, questions about their track record on safety and wrangles about boardroom governance and their listing structure.
BHP Billiton, or BHP as it now is, has all of this and more: tax disputes, runaway trains, mining problems that have ruined ambitious productivity targets and, for the past three years, an activist investor in the form of Elliott Advisors pressing it to offload assets and simplify its structure. Where to start?
The group was formed from the merger in 2001 between BHP and Billiton and only dropped the latter from its name at the end of last year. Broken Hill Proprietary was created as a lead and zinc miner in Australia in 1885 and Billiton began in 1851 with a tin mine on the Indonesian island of the same name.
BHP is a FTSE 100 diversified miner specialising in iron ore, copper, coal and petroleum. It is dual-listed in London and Australia, employs 62,000 staff and contractors and operates in markets from Singapore and North America to Trinidad & Tobago and Algeria. In its most recent financial year, the group made an underlying profit of $8.9 billion on revenues of more than $43.6 billion.
The past couple of years have not been easy. The fatal collapse in 2015 of the Samarco dam operated by one of its joint ventures in Brazil tarnished BHP’s reputation for safety and has led to multibillion-pound lawsuits and criminal charges against the group’s former chief executive and board representatives. BHP and its joint venture partner Vale have denied the charges.
In early 2017, Elliott emerged with a stake that it later increased to more than 5 per cent and called on BHP to abandon its dual-listed structure in favour of an Australia-only listing, a demand that it has resisted on cost grounds. The New York hedge fund also pressed BHP to dispose of its US shale assets, a process that the miner subsequently accelerated, selling a business to BP last July for $10.5 billion that it bought for about $20 billion seven years earlier. The proceeds went to shareholders. More recently, a runaway train had to be forcibly derailed after travelling 57 miles without a driver. The disruptions caused, and a series of unplanned outages at its copper mines, obliterated BHP’s target of boosting its productivity during the 12 months to June by $1 billion. Underlying profits for the first half were also 8 per cent lower as a result.
This all clouds a business that is otherwise motoring along in its largest market of iron ore; prices have dipped but the miner is cutting its cost of production. Profitability in copper, its second-largest business, and one seen as being in long-term structural demand, suffered during the first half of the year from lower production and lower selling prices.
The government may be phasing out coal in Britain but the polluting fuel remains in strong demand elsewhere, notably India and China, and BHP is one of the largest exporters of the commodity for use in steel-making.
Producing and exploring for oil and gas is the smallest part of BHP’s main businesses but remains highly profitable and a growth market. As a group the miner operates at a margin of an extremely healthy 55 per cent.
BHP’s shares, up 28½p, or 1.6 per cent to £17.96¼, can be hit by commodity prices and macroeconomic shifts but have performed well in the past three years. They trade at 14.9 times Credit Suisse’s forecast earnings for a yield of about 5 per cent. Respectable, but the return is forecast to decline.
ADVICE Avoid
WHY In many ways impressive but uncomfortably prone to accidents that can prove extremely costly
Senior
The recovery at Senior seems to have bedded in well, but the engineer’s share price suggests that investors are cagey about the company’s outlook. Having warned on profits twice in 2016, the group has come back strongly, helped by cost-cutting under its chief executive since 2015, David Squires, but the shares are still near two-year lows.
Senior was set up as Senior Economisers in 1933. Having listed on the stock market in 1947, the company has grown steadily through acquisitions and changed its name to its current one in 1999.
The group works as two divisions, which have 33 separate operations spread across 14 countries, but makes more than half of its sales and two thirds of its adjusted operating profits in North America.
Aerospace, which accounts for about 70 per cent of revenues, is mainly about making high-precision parts for aeroengines, including some work in defence. Its customers include Airbus, Rolls-Royce and Boeing, including providing parts for the 737 Max jet, which is under scrutiny after two fatal crashes.
There is no suggestion that any of its parts contributed to the two disasters, but the sharp change in sentiment about the US planemaker has weighed on Senior’s shares.
Aerospace performed well last year, improving revenues by nearly 7 per cent to £760.4 million, and the short-term indicators, including higher forecast deliveries by both Boeing and Airbus, look healthy.
The second division, Flexonics, makes such items as valves for the oil and gas sector and emission control systems for diesel engines and its customers include heavy equipment makers such as Caterpillar. This makes Flexonics sensitive to cyclical industrial sectors and trade tensions, which means that China-US tariff battles and downbeat comments on trading from the likes of Caterpillar have depressed the shares.
Flexonics lifted revenues, operating profits and its margin last year, but it highlighted talk of lower likely production growth among North American heavy truck makers in the second half of this year.
The shares, down 2¼p or 1 per cent to 210½p yesterday, trade for 14.3 times Numis’s forecast earnings for a yield of about 3.4 per cent. Enticing.
ADVICE Hold
WHY Cyclical uncertainties but good long-term prospects
